"It illustrates the primary reason why we are trying to push, to have better military-to-military relationships [with China]," he said.
China’s foreign ministry said it was not aware of the incident.
Lieutenant Sarah Self-Kyler, spokesman for the US Navy, said the Chinese Song-class submarine was sighted near the carrier group by a US aircraft near Okinawa, Japan.
"Cold War thinking"
Both ships were operating in international waters at the time, she said, and "there was no communication" between them.
Fallon’s disclosure came at the same time that Admiral Gary Roughead, the commander of the US Pacific Fleet, was in China overseeing the first joint exercise, scheduled to start on Sunday, between the American and Chinese navies.
"It's a modest search-and-rescue exercise, but it's a start ... so that we can move ahead from what I would characterise as kind of Cold War thinking," Fallon said.
He made the remarks while in Kuala Lumpur for a 23-nation meeting for defence chiefs. China declined an invitation to attend the meeting, but Fallon said he was hopeful that it would send representatives in future.
Fallon has visited China three times since taking office about a year-and-a-half ago.
Visits between the Chinese and American militaries were scaled down after the collision of a US spy plane and a Chinese fighter jet off China's coast in 2001, but relations appear to have improved recently as Washington cautiously seeks to increase exchanges.